What is the Funding Rate?" đ
The funding rate is the difference between the current market value of a perpetual contract and the index price, which is equivalent to the value of the underlying asset.
The funding rate ensures that the derivative's quotes are aligned with the index, stimulating trading of contracts near spot prices. It is the basis for periodic payments to traders in the perpetual futures market.
Depending on the value of the asset, the financing rate may be:
đą Positive - the futures price is higher than the underlying asset. In this case, the commission is charged to traders who take long positions.
đ Negative - the futures price is, accordingly, worth less than the asset on the spot market. In this case, the funds are lost by holders of short positions.
What is important to know?
1ïžâŁ The funding rate not only ensures price parity in the futures market, but is also an indicator of investor sentiment.
2ïžâŁ At low funding values, short positions dominate, indicating a short-term bearish trend and vice versa. The rate can be used to track the emergence of imbalances in the market.
3ïžâŁ In some cases, it will simply be unprofitable to hold a position for a long time, so it is worth considering funding indicators before opening a medium-term deal.
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